What Is Non-Dilutive Funding?

Deciding the type of funding your startup needs can be a challenge for most founders. With so many options available, it is important to understand your options and shop around for the best funding source for your business needs. 

Non-dilutive funding is a great option for many startups, especially those in the early stages of growth, that don’t want to dilute shares of their company. But how do you know if non-dilutive funding is right for your startup? Keep reading to find out.

Non-dilutive funding is any funding that a business receives that does not require an exchange for equity or ownership in the business. This is often done in the early stages of a business’s lifespan to ensure founders maintain equity during initial growth stages. 

Non-dilutive funding commonly requires funding to be paid back with interest rather than an equity stake in the company. However, there are some versions of non-dilutive funding that are not paid back, such as grants and awards. These non-equity funding options can still include obligations such as restrictions or oversight from the organization offering the grant. 

There are several examples of non-dilutive funding options available to startups, from venture debt to revenue-based financing. Knowing the right one for your startup depends on its needs as well as the amount of capital required to scale the business. 

Venture Debt

Typically generated through banks, financial institutions, or online lenders such as Mercury, venture debt is a common type of non-dilutive funding. With venture debt, capital raised is paid back with interest in most cases. Venture debt also commonly requires the startup to have raised venture capital (VC) within the past year or to have a plan to do so in the near future. 

Grants

Government grants or small business grants are highly sought-after forms of non-dilutive funding as they are rare and, most importantly, are not paid back by the startup or small business receiving them. Essentially, grants are free money for your startup. However, grants can sometimes come with strings attached, including extensive oversight and strict reporting requirements. 

Crowdfunding 

Crowdfunding or peer-to-peer lending involves generating capital from several sources – usually on sites such as Kickstarter or IndieGoGo. This requires a strong marketing strategy and may entail sending your product or offering your service in exchange for investment. For startups, crowdfunding isn’t usually the best option for securing funding if used alone. 

Business Loans 

Startup business loans are generally offered by banks, credit unions, online vendors, or government institutions such as the Small Business Administration (SBA). Business loans offer qualifying startups quick access to capital without sacrificing ownership. One caveat is that these funding options can be difficult to qualify for if you have bad business credit or are a business younger than two years. 

Business Lines of Credit 

A business line of credit is typically acquired through a bank, credit union, or online vendor and can be a helpful tool in not only increasing your startup’s liquid cash flow but also building business credit. Unlike business loans, with business lines of credit, you will only pay back what you spend and interest rather than a set loan amount. 

Revenue-Based Financing or Royalty Financing 

Rather than contributing a percentage of your startup’s equity, revenue-based financing or royalty financing involves investment in exchange for a portion of the startup’s monthly revenue. This is paid in lieu of interest payments until the entire amount is repaid. 

Tax Credits

Unlike many non-dilutive funding options on this list, tax credits won't necessarily create more liquid cash for your startup. However, tax credits will help to increase retained earnings, which is the profit left over after paying direct costs, indirect costs, dividends to shareholders, and income taxes.

Merchant Cash Advances (MCA) 

Merchant cash advances (MCA) are one of the riskiest non-dilutive funding options available as they involve borrowing money against predicted credit card revenue. An MCA typically involves extremely short repayment terms with high interest rates, making them less than ideal for most entrepreneurs. To be eligible for this type of non-dilutive funding, you must meet minimum monthly sales requirements.

Unlike non-dilutive funding, dilutive funding (also referred to as equity funding or equity financing) requires owners to give up a percentage of ownership to investors. This is also referred to as dilution of shares. Equity financing is typically raised through venture capital firms or angel investors. 

The key difference between non-dilutive funding and dilutive funding is that rather than paying back the amount raised, dilutive funding is paid through an equity stake in the company upfront.

Non-dilutive capital can be a strategic choice for startup founders for a variety of reasons, from maintaining control of their company to strategizing more favorable funding terms in the future. While there are always drawbacks and strings attached to startup funding, there are also several benefits to choosing non-dilutive funding for a startup:

• Maintains control – This funding type doesn’t dilute your ownership, allowing you to maintain more control over your startup without worrying about interference from VCs or angel investors. 
• Great for founders with small networks – Securing VC funding for startups can be tricky if the founder doesn’t have a strong network. Non-dilutive capital reduces the need for a large network as a founder. 
• Less personal risk – With non-dilutive funding, founders aren’t typically required to provide personal creditworthiness or offer personal collateral. 
• You can leverage your revenue – With some types of non-dilutive funding, you can leverage your current or predictable revenue to obtain funding that is right for your business. 

There are a myriad of benefits to choosing non-dilutive funding as an alternative to or in addition to a dilutive funding source such as VCs. To determine the right funding source for your startup, you need to assess the amount of funding you need, the pros and cons of diluting equity in your company, and shop around for funding sources your business qualifies for.